Q&A with Tony Williams Research Analyst at Hardman & Co

Hardman and Co Research Analyst Tony Williams caught up with DirectorsTalk to discuss the market’s reaction to Brexit, whether this is a re-run of the global financial crisis and the effect of Brexit on house prices and the housing market

Q1: Now Tony, you’ve been around a bit, have you seen anything like the market’s reaction to the Brexit vote before?

A1: Well I’ve covered emerging markets for more than 3 decades and I don’t think I’ve ever seen a share price fall 77% in a single day and that’s what happened to Redrow plc (LON:RDW) on the 24th June and Bovis Homes Group plc (LON:BVS) wasn’t far behind that at 58%. Now these were intraday movements, I mean they didn’t close at that, happily they closed at 22% and 25% down respectively but they were freefalling during that period because the market was so surprised at what happened.

Q2: I was just about to ask, do you think the markets were prepared for this?

A2: Well it was very odd to me in a 2 horse race that everyone was convinced who the winner was going to be and the financial markets, the currency markets and not just the UK equity markets but Europe which actually fell further than the UK on the 24th and even in Asia and the US. Even the bookies, and the bookies are often the ones, forget the opinion polls, it’s often the bookies get these right and they were wrong footed as well, so there was a huge knee jerk reaction on the 24th when the market realised it was totally 100% diametrically opposed to, not opposed but certainly wrong footed to what the result was. I think the most significant for me was that the FTSE 250, which is much more domestically orientated if you will than the 100, fell more than 7% on the 24th, actually closed 7.2% down.

Q3: Now is this a re-run of the global financial crisis?

A3: I don’t see it, I mean it’s not the ‘Lehman’s moment’ as I call it when Lehman’s went bust in September ’08 and we had the global financial crisis, this is a domestic issue, ok it’s got ripple effects across Europe and other markets but it is primarily a domestic event. I do believe there is life after death, if you will, I still see economic growth perhaps 1% not what we were expecting around the 2% mark, inflation will rise inevitably because the pound is weaker but that makes exports cheaper, it attracts foreign investment and I also think that Mark Carney, he’s come in for a bit of flack but I actually think his announcements since the 23rd have been good and I call him really a steady hand on the tiller. So it’s not a re-run of the global financial crisis, it is a domestic issue and it’s going to take some time to play out but this economy will still move ahead, just not move ahead as quite as smoothly and to the scale that we were previously expecting.

Q4: What happens to house prices?

A4: It’s very rare in my career that you get people at City Bank and some of the other major institutions that are actually saying ‘I don’t know’, now they’re not literally saying ‘I don’t know’ but they’re as close as they can be to saying they don’t know, even people like Tony Pidgley, who is the Chairman at Berkeley Group, and he’s got a sixth-sense of these things and even he doesn’t know what’s going to happen. When the sector falls 36% as it did on the 24th June, and it’s still round about 30% down, this says to me we’re going to have a full blown recession and a collapse in house sales and house prices, I don’t see that, I think house prices are a little toppy anyway, I think we’ll get a few percentage clicks down during the course of this year but I don’t see them falling off again, I really don’t. I see a bump in the road, if you will, 1% or 2% maybe 3% coming off and then sort of business as usual.

Q5: So if there’s no recession or collapse in house prices, what do you see happening in housing?

A5: I still think, I mean we are the fourth or fifth largest economy in the world, we have virtually full employment, for me 5% unemployment is full employment, average earnings are just about creeping back into positive territory, we lose more houses each year than we build through dilapidation and demolition and the like and household formation keeps rising. It keeps rising because of lifestyle changes, divorce rates are factor, more people living along, immigration dare I say it is another factor which is running up and under the household formation so there is a huge demand for new houses in the UK, simply because there’s just many more people wanting to set up home. So I think with a reasonable economy which I see maybe around the 1% mark growth continuing higher levels of employment, average earnings nudging up, fantastic demand, I think on the demand side that’s all going to take care of itself and you’re looking at an industry which has reinvented itself from ‘08/09. No one has any debt amongst the leading housebuilders, they’re all better managed in my view, they haven’t really gone off and pushed land prices and so I don’t see these big writedowns so you’ve got a more professional industry, an un-geared industry and an insatiable demand. Now, we’ll had a period of uncertainty over the next month and 3 but I still see it moving forward and seeing growth running into ‘17/’18/’19 so yes, it’s not going to be quite as good as was but I see no reason to believe that this industry and these companies will move ahead and I think all the special dividends that they’re saying they’ll pay they’ll continue to pay. So as an investor, what you’re looking at is a nice bit of yield, in some cases 8% or 9% in the short term whilst the market sorts itself out and decides where the share prices go and ultimately the share prices will come so at this point I think there’s great opportunities in the marketplace particularly when you’ve got, as I said, those yields of 8% or 9%.

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